Month: October 2013

It seems no matter what stage your company is in, entrepreneurs are always told that “best practice” is to have an advisory board. Like Mickey’s advice in that scene from Rocky, the right advisors, friends and colleagues are good resources when you face certain business problems. But just like any other idealistic solution, there are pros and cons to having an advisory board.

On the pro side, it is true that a properly structured advisory board can be a real asset especially to a younger entrepreneur. People with the experience (especially in your industry) or with skill sets which do not exist in your current management team certainly add to an entrepreneur’s arsenal. Most advisory board members are very conscientious, sincerely want to help and can provide invaluable guidance. But the advisory boards that are the most successful are those where there is a clear set of expectations on both sides as to what the role of the advisory board will be. If the entrepreneur realizes that these members are a sounding board and are not necessarily problem solvers nor fiduciary agents, he or she can maximize the value that a board can bring. I strongly encourage an advisory board particularly when the entrepreneur is struggling with issues they may not yet want to share with their management team.

But like nuclear energy that can either be an effective tool or a disaster, misdirected advisory board members can also create chaos. Especially for young entrepreneurs, at times advisory board members think that they have a better answer and instead of just listening to the entrepreneur and trying to provide guidance, they begin to direct. In fact, in doing work with certain early stage companies at accelerators, we have had a few instances where the mentors or advisory board members actually threatened to either take over the company or to place the entrepreneur in a position where they begin to doubt their leadership ability. Not the desired outcome.

So some simple rules:

Don’t just bring on anyone as an advisory board member. In addition to their knowledge, make sure you are compatible with their style.

Get a reference check from other advisors or entrepreneurs as to their experience with that individual as an advisory board member. It certainly is fine to have them challenge what you are thinking but very strong willed and opinionated board members can lead to dysfunction instead of helping you move the ball forward.

Finally, make sure the person has the time and wants to serve in an advisory board capacity. A number of my colleagues who serve on advisory boards will not do so unless they have a stake in the company. Their belief is that unless they invest, their advice will be ignored as they do not have any “skin in the game.”

Following some simple rules will allow you to have an effective advisory board which I believe is one of the keys for any successful venture.

At the risk of sounding like a David Letterman skit, I would like to present my Top 10 List for this category. By the way, there is no scientific research to support this and I realize many others have published similar lists. I just reflected on my 35+ years of experience with startup/early stage entrepreneurs and where I have spent the most time working with them to rectify some significant shortcomings. So, you might say this is my “if I only knew then what I know now” list. I hope there is a nugget or two for you to use… so, let’s see what the list brings:

10. Loving the product/service more than the customers. This is the infamous “build it and they will come” syndrome. These ventures are usually DOA – it’s just that the entrepreneurs do not know it.

9. Unaddressed bad equity splits. Cutting up the pie is tough enough – giving it to the wrong people for the wrong reasons is often fatal. It is tough to move forward when you are focused on significant internal matters like equity distributions.

8. Going it alone. This is the equally infamous “no man is an island” syndrome.

7. Talking more and listening less – to customers, potential financing sources and advisors. God gave us two ears and one mouth…

6. Ignoring warning signs – there is a reason your body feels pain – it tells you something is wrong. Problem signs in a business are the same and at times we react the same way we do to that pain in our body – ignore it and it will go away.

5. Bad acquisitions (usually the first one) – either deals for the wrong reasons or good deals with poor execution.

4. Growing too fast – probably saw more ventures go down because of this than those that had a fall off in business. Growth makes you feel good and can hide strains on your venture like not enough people or funds.

3. Not knowing when to get out – never get in without an exit plan

2. Inadequate financing – what was the last thing you did personally or in a business that came in on or under budget?

And the number one reason why startups and early stage ventures fail? – PEOPLE – usually the wrong ones in the wrong roles preventing execution of the vision. Every financing source I have ever spoken to looks at management over product. When picking your team avoid the “yes man” syndrome. I had a client who was a real control freak and his favorite saying was “I always admired a subordinate who could stand up and say – you said it chief.” His venture hit the dirt nap trail pretty quickly. So, spend sufficient time developing the best team possible.

Quote: “It’s good to be the King” – Mel Brooks (too many times to do attribution)

So here is the scenario – you are running a solid business; you own 100% and everyone around you (including employees) are advising you to consider sharing ownership. In private, you mull this over but very honestly, as Mel Brooks has said so many times, “it’s good to be the king.” Nobody to answer to; no pesky shareholder meetings and no reports to outsiders. Privacy, confidentiality, lots of benefits. You wake up every day, look in the mirror and have your board meeting. Life is beautiful.

Please do not misunderstand me; I do not mean to give the impression that sharing equity is wrong; there are too many success stories and some empirical evidence which supports the benefits of sharing ownership. But, to me, ownership is a state of mind. I have seen receptionists who exhibited more ownership traits than some partners did. Ownership is part of a culture of sharing and inclusiveness. It is in this type of organization that equity sharing works. But, for some mature and growing companies, owners are not ready to take on “partners.” Regardless of what others are saying, equity sharing does not work where two conditions exist; either a culture that does not embrace ownership in employee work styles (a subject I have blogged about before) or where there may be owner remorse.

I think we all know or have read about those “ownership cultures.” This is the Zappos/Southwest Airlines culture – everyone does what they have to do to give the customer the ultimate experience and behind the scenes, everyone does what they have to do to move the ball forward. They are terrific and can be created and when they exist, equity sharing is a natural extension. But what about owner’s remorse?

Some owners are meant to share and others are not and that is fine because I have seen both being “successful.” But, keep in mind any equity sharing type of program (we will cover the types in another blog) are designed to be incentive plans. If an owner or owners are uncomfortable with sharing, any equity incentive program will quickly become a disincentive and not only lose its value, but perhaps become a negative value driver. As an owner, you give some ownership and expect all to share the “burdens” that only entrepreneurs bear and understand. When they don’t, you stay up nights wondering if you made the right decision to give them equity in the first place.

So, two simple ideas to avoid equity remorse:

Avoidance – if you do not feel comfortable sharing equity or ownership in any form, or your culture is not right for it, do not do it. Better not to have it than to regret it every day.

Alternatives – work with your advisor on bonus or “equity like” plans. There are plenty out there that do not have that “hangover” effect.

Just keep in mind – equity can be a “forever” thing so tread carefully!

I often think of this hilarious scene from Spaceballs when I have a discussion with an established entrepreneur regarding the potential sale of his or her business. This scenario is even more relevant if a sale is being contemplated and there is no other pressing issue impacting the decision.

In many cases, an entrepreneur faces circumstances which create a “burning platform” around the decision to sell. Situations such as a significant disagreement with another partner or a financing source, or a major illness are just a couple of the circumstances an entrepreneur may face where a sale is the most likely course of action. However, I am not referring to these scenarios as, believe it or not, a very difficult decision to sell is really forced upon the entrepreneur so they at least avoid the agony of this process. The more relevant scenario is when there is no burning platform but the time might be right to sell and move on. When not forced to make the decision to sell, most entrepreneurs are never sure about timing, and procrastination is often a very comfortable state. “Business will get better and we can wait until then” is what we often hear. But, the real question is… When will then be now; when is it time to start the process?

I have always been concerned about the concept of seller’s remorse. I experienced it first-hand early in my career when one sale did not close solely because the owner feared what life would be like after the deal. There were no gating factors and the purchase price was more than acceptable but the entrepreneur had not really thought through what it would be like not having a business to run. He realized all of the stressful daily events he longed to get away from were also exciting and, in a way, brought purpose to his life. Being respected by peers and looked up to by employees also created a great deal of emotional satisfaction. He simply had not come to grips with this potential life changing event.

In reading about the contents of a transaction advisors’ seminar a couple of years ago, I saw the phrase “emotional due diligence.” The seminar premise was to advise transaction professionals to delve deeply into the reasons behind the planned sale and in addition to economic due diligence, it suggested they perform emotional due diligence on sellers. So, for those contemplating the sale of the business where there is no burning platform, I offer the following advice:

Start thinking about it today (yes, then is now.) Consider what life will be like not going to the office early every morning or staying late at night. Determine if you can live in a world without your “baby”

Revisit any decision to sell. How do you feel today about that decision you made a month or two ago? Do you still feel good about it?

Talk to a close friend like your spouse. Are they convinced that you are ready to sell?

Keep your expectations in check. Shooting for too high a price or believing that you can sell your business and still stay in control are really non starters.

Don’t do it yourself. Selling your business is not like selling your product and much like you probably wouldn’t sell your house on your own, the right advisor and team are paramount to execution.

Keep in mind that the decision to sell will involve time, money and substantial distraction from your business. So, try not to get started in this process if you do not think you are ready.

This blog is dedicated to all entrepreneurs. At its core, is an author who has been passionate about them since childhood and has had the privilege of guiding and at times, comforting them at every stage from start-up to growth to mature for over 35 years. This unique lifelong process allowed me to assemble helpful tools, processes, lessons and some good old “Dutch” uncle advice. This blog is meant to share (with some humor, hopefully) as much of that as possible with those that truly drive the economy - our entrepreneurs.

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